In a recent Cafe Economics column, Niranjan Rajadhyaksha called for greater communication from the government to explain why they are doing what they are doing.
With the Prime Minister convalescing, that does not appear imminent. India, it appears, is on autopilot. On most occasions, that is not a bad thing. By and large, active governments in India have done more harm than good. But the times are different. People are fearful, hesitant and uncertain of the future. The country needs visible leadership.
Leadership is not about mouthing meaninglessly optimistic statements on growth. That carries little credibility with a public that has only seen over-promising and underachieving governments. For instance, when it came to office, the United Progressive Alliance (UPA) promised to eliminate the revenue deficit by March 2009. It is likely to remain at 4.4% of the gross domestic product (GDP).
Rohini Malkani of Citigroup in India notes that the assumptions on the nominal GDP growth (10.9%) and overall tax collections (up 6.7%) for the next fiscal year are optimistic and hence the fiscal deficit is likely to overshoot the government’s target of 5.5% of GDP. However, there won’t be any need to issue oil/fertilizer bonds and that would bring the overall deficit (including that of state governments) to 9.5% of GDP in the year 2009-10, from the 11% likely this year. These are still high numbers. Most of the slippage, she points out, is due to populist measures and the non-implementation of market-based pricing. She is referring to petroleum goods. Even now, the government retains control over it.
Somewhat cleverly, in its press release dated 7 December, the Prime Minister’s Office said the fiscal slippage in the current financial year, due to the farm loan waiver scheme and the salary revision for government employees, was deliberate and in anticipation of the global crisis. If it anticipated the impact of the global crisis on India, then it begs the question of why it was holding on to 9% growth estimates up to September. It does not add up.
It is one thing to invoke fiscal policy to bolster growth but it is another thing to ensure that it achieves outcomes. In India, the problem has been both with the quantum and quality of fiscal spending. Singh promised administrative reforms when he assumed office. We have seen little of them.
Boosting confidence is important but doing so without losing credibility is even more important. Even now, government is talking of a quick return to 7% GDP growth in the coming fiscal year. That is a stretch. It might be possible but under some extraordinarily optimistic assumptions about global growth, risk appetite and capital formation in India. Credible communication implies honest communication. That is the first step to restoring confidence.
Rajiv Gandhi had the courage to question the efficacy of government spending. In his manifesto for the elections in 1991, whose draft versions were bolder, he promised sweeping reforms of the public sector. This Prime Minister has to fulfil his vision. It would not only bring down the fiscal deficit but also raise efficiency. With capital availability likely stymied, efficiency of already invested capital should be harnessed for growth. Privatization is one important avenue to reach both ends.
What is needed is straight talk and leadership to paint a road map for the medium-term future of the country. The current Prime Minister still enjoys the credibility and intellectual stature to do both. He has not done so—certainly not often enough in the public domain. He must communicate directly with the public. Former prime minister Atal Bihari Vajpayee mused annually. Many Indians found that refreshing and connected with him better. This Prime Minister should emulate that but do so more frequently.
Intellectual stature is like option securities in one respect. If unexercised, it expires worthless. It differs from option securities in another respect. If exercised, it does not become void. It stands enhanced.
Despite his not doing much to refurbish his credentials as a reformer in the last four years, the nation remembers Manmohan Singh as the architect of India’s economic liberalization. There is a risk that India’s potential growth rate, far from climbing above 7%, has actually dropped because no reform that would raise it has been undertaken in recent years. Singh should ensure that his government’s fiscal policy does not lower it further. As a distinguished economist, the risk of leaving India with a lower sovereign credit standing than he inherited from a poet should galvanize him.
At this stage, the Congress party needs him more than he needs it. He must not hesitate to choose loyalty to the nation over loyalty to the party. In fact, there should be no conflict between the two.
Surrounded by intellectual pygmies in his own party and a confused opposition, the Prime Minister holds all the aces. It is time he realized that. The nation will be grateful if he does so.
V. Anantha Nageswaran is head, investment research, Bank Julius Baer & Co. Ltd in Singapore. These are his personal views and do not represent those of his employer. Your comments are welcome at email@example.com